Can Advisors Actually Measure Success?

Practice management experts frequently seem to be urging you to create a scalable enterprise, acquire professional management and develop clear metrics that will help you make better operational decisions. It appears that the profession is going through a phase where thousands of practices are taking this advice to heart, becoming businesses either through mergers of equals, acquisitions of firms of retiring advisors, or hiring key employees and turning them into partners.

Ross Levin, president of Accredited Investors in suburban Minneapolis, worries that something important is being lost in this trend. "As firms grow larger, metrics become an increasingly important part of measuring how you're doing," he says, "and perhaps even what you should be doing. The problem is that an incredible amount of things that are important are invisible to the metrics."

But, Levin asks, shouldn't we instead be looking for ways to measure quality over quantity?

RIGHT CLIENTS

The way the profession measures things, Accredited Investors has $1.3 billion in assets under management, with 400 clients, and is growing like the proverbial weed.

But Levin measures his planning operation very differently. "Our intent at the firm, at least from my standpoint, is not to gather assets," he says. "We have never said we want to be a $2 billion firm or a $5 billion firm. We look at it as: We have 400 clients, and if we do a really good job for those 400 clients, then next year we'll have 440 clients. To me, that's the best way to see how well you're doing. It means that the clients are helping you grow the business.

"We want to work with the right kinds of clients," he says. "When someone comes in as a prospect, you have made them into an object. When they are coming in as a person, then you can figure out what makes the most sense for them - and whether it is us or someone else who can help them determine that.

"Sometimes, it means you end up losing business," he adds. "But, hopefully, you're losing the business that you should be losing."

CORE METRICS

Moving to a more granular level, the incentive compensation for employees at larger, increasingly sophisticated firms is based on metrics that emphasize:

*Efficiency (How quickly do certain tasks get done?).

*Productivity (How many clients can I bring in? How much work can I move off my desk in a given week?).

*Profitability (Did I come in under budget? Is the firm generating more profit this quarter than last?).

"You're trying to create measurements for specific things that will lead to specific behavior," Levin says. "But it can be at the expense of other things that I think are more valuable in a lot of ways."

Such as? "One of the non-measurable things that I think is really important is: What is the quality of the client relationship?" he asks.

"The quality of the client relationship is measured by the things that they say about you in the community, or how they're willing to work with you when you make a mistake, as opposed to looking for a reason to jettison you," Levin adds.

Some emotional rewards are equally hard to enter into a spreadsheet. "It is very difficult to measure how grateful clients are for changes that you've helped them make in their lives, or how appreciative the staff is for the things that you're doing in the workplace," Levin says. "And it's hard to put a number on the way people are treated.

"We have the golden rule: Do unto others ..." he adds. "But there is a platinum rule, which is do unto others what they would want you to do. I don't know how you build that into the incentive plan."

Levin's fear is that, as his own advisory practice becomes more professionally managed, there will be a tendency to emphasize what can be measured, with a corresponding loss of attention to the things that cannot.

"We want to make sure we're doing the right thing, rather than following a prescription," he says. "If a client calls and says, 'Can I afford to buy this house?' that to me is an opening to discuss what the concept behind the new house is. What is it going to do for you? What are you hoping to get from it? Rather than jumping into the spreadsheets."

EMPHASIS ON QUANTITATIVE DATA

For the profession at large, the temptation to reduce decisions to numbers may be greater than it is in other fields, simply because advisors are comfortable with numbers. And as the rainmakers who founded practices build out their staffs with college-trained analysts, efficiency will tend to become a higher priority than relationship quality.

"In our firm, as we take on more partners, my own voice is becoming diluted," Levin says. "There is good and bad in that, and the firm is definitely changing from the way I birthed it. The question is: Will it always have as much of a sentiment as it does now? I don't know," he says, answering himself. "What I want to do for our firm in the last 15 years of my career is try to figure out how to get people to keep asking, 'Why?' rather than to come up with the 'How.'"

To be clear, Levin is not arguing that metrics are not useful. "I would be the first to say that there are some firms out there that have grown faster than ours, that have done things that are more metrics-oriented," he says.

"One of the cop-outs in our industry is that people say that if you do a good job for people, you can't get big. That isn't true." The trick, he says, is to "figure out how you can run the business and still do a good job for people."

The core values of the profession align clearly with the issues Levin is raising. The new business metrics that have to emerge inevitably from increasingly professionally managed firms will tend to be askew from these core values.

FOLLOWING DOCTORS' PATH

Doctors went through a similar transition many years ago, morphing to the HMO model from the trusted family advisor. In the process, doctors achieved spectacular increases in efficiency. Advisory firms now seem to be headed along a similar path. But will advisors also lose that trusted place in the lives of the community, which the medical profession largely gave up 50 years ago?

The next time you read a practice management article whose advice focuses entirely on growth, efficiency, scale and incentives, consider this column to be the other side of the story. If you navigate purely by metrics, you are missing what may be the bigger part of the value proposition that made you successful in the first place.

"At the end of the day, you can measure a client's net worth and return on investment," Levin says. "But the things that really fulfill you are the things that numbers aren't necessarily tied to.

"There are a million different reasons why clients who are in a strong relationship with us are a better fit than clients who just want a rate of return," Levin says. "If our biggest fear is online tools that make people into do-it-yourselfers, then we should remember that the only thing that separates us is the stuff that can't be measured."

Alas, those are subjective, hard-to-measure reasons. It would be nice if Levin could define precisely what those factors are. But if he could, then they would be metrics.

Bob Veres, a Financial Planning columnist in San Diego, is publisher of Inside Information, an advisory industry information service. Visit financial-planning.com to post comments on his columns, or email them to bob@bobveres.com.